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Revisiting Return Profiles of Real Estate Investment Vehicles As a follow-up to "Understanding the Return Profiles of Real Estate Investment Vehicles" (WRER, Fall 2003, Vol. 7, No. 2), the authors take a more in-depth look at simulating and comparing return profiles of four alternative real estate investment vehicles (Core, Core Plus, REIT, and Value-add funds). Modifications from the original article include: using the Value-add vehicle net cash flows to determine the level of investments in the other vehicles; staggering investments over three years rather than assuming all capital is invested upfront; adjusting the management fee calculations; and calculating after-promote limited partner IRRs for the Core Plus and Value-add funds.
The South Florida Condominium Market Approximately 15,000 high-rise luxury condominium units are currently under construction in South Florida, with more than 50,000 additional units either planned or proposed for the area. Rapid price appreciation has occurred for both new and existing condominiums in the area. Similar, but less extreme, price appreciation in the late 1970s and early 1980s preceded declining values in subsequent years. Although condominium price appreciation in recent years has mirrored similar gains in the single-family market and in prices nationwide, price appreciation for preconstruction units and the overall volume of activity are causes for concern. The risk for declining values is most significant in the luxury market, but risk is high throughout the region and all product segments. As tens of thousands of new units come online and speculators attempt to flip their units to owner-users, supply will outstrip demand and recent price increases will come to an end. The speculative investors who are unable to close on their units, the developers who have sold to those people, and the lenders who have lent to those developers are poised to potentially experience substantial loss.
Real Estate Market Fundamentals in South Florida The authors estimate that the number of new condo units delivered in 2004 in South Florida was 9,000. Approximately 50,000 condo units are either planned or under construction in 2005. With an absorption rate of at best 12,000 units per year, it is hard to justify these numbers, especially when condo conversions will produce another 13,000 units. If the condo market were to take a downturn, owners would initially attempt to rent their units in order to generate cash flow. With time, the oversupply of rental units would drive rents downward. A dramatic decline in rents would cause speculators to struggle to meet debt service, tax, and insurance requirements. It is at this juncture that they would put their properties on the market for sale. An over-supply of units on the market would dramatically drive the market value of the units below the investor’s break points, causing a bust.
Is U.S. Real Estate Over-Priced? Commercial real estate prices are hitting record highs. Debt and equity capital is flowing to U.S. real estate at unprecedented levels. The authors point out that low interest rates are one of the key factors driving the market. Yet they do not foresee plummeting prices, even if interest rates rise to the 5 percent level, due to the depth and breadth of capital interest. Their advice is to focus on value-add real estate investing and to prepare properties for resale into an expanding "core" market. While real estate pricing has not yet reached "bubble" proportions, in their view, the authors concede that the market is awash in capital.
The Playground City The author argues that having lost the economic and demographic initiative to the hinterlands, cities have two alternatives. They can work to become more competitive in terms of jobs by attracting skilled workers and middle-class families, or they can become playgrounds for the idle—and not so idle—rich, the restless young, and tourists. Many cities seem to be adopting the latter strategy, regarding tourism, culture, and entertainment as "core" assets, just as Venice and Florence did years ago, and Las Vegas and Orlando do today. However, in a global economy, only certain cities can be successful playground cities. Given their reservoirs of entertainment venues, cultural institutions, and "hip" districts, they may be able to attract a sufficiently large customer base of tourists, young professionals, and older affluent residents and visitors hoping to experience a more diverse way of life. It is not clear that older, industrial cities that lack these attributes can successfully convert themselves into playground cities.
Immigration and Real Estate Markets Immigration is expected to account for half of the U.S. population growth between 2005 and 2050, which will make it an important influence on future housing demand. In the short-term this influence is felt in a small number of port-of-entry metropolitan areas that have large immigrant communities. The author discusses the different ways in which immigrants may affect local housing markets in these areas, and presents data on twenty major metropolitan areas. In the long run, it is likely that immigrants and their offspring disperse and assimilate. As some immigrants and their offspring can be expected to leave immigrant enclaves for other cities, when that process of decentralization occurs, housing demand will decrease in immigrant cities and increase in alternative locations.
The Pioneering "Levittowner" In a series of planned communities built in the 1950s, William Levitt & Sons introduced the American public to modern production building, and demonstrated how standardization, mass-production, and technical innovation could be successfully used to produce houses for a large market. They proved that working Americans were attracted to suburban living no less than their wealthier counterparts. Finally, they showed how entrepreneurial efforts could create cheap, quick, lasting, and flexible housing that could not have been provided by government efforts. This paper describes the details of the community and house design of Levittown, Pa., and discusses the relevance of these concepts to production housing today.
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